Thursday 28 April 2016 4:42 am

The death of Aim: Can equity crowdfunding eclipse the LSE's junior market?

The alternative finance market enjoyed near triple-digit growth last year, with the value of its loans, investments and donations hitting £3.2bn.

Within this, the main sub-sectors of peer-to-peer lending and equity crowdfunding significantly increased awareness of the concept of lending directly to individuals – excluding those entities like the banks which have for too long dominated markets and winning over ever more people.

Crowdfunding has already enticed some of the biggest businesses in the UK, including John Lewis and The Jockey Club, which owns racecourses including Cheltenham. These two businesses, which could have gone down the traditional banking route to raise additional capital, attracted £75m of private capital between them by issuing minibonds.

One market which appears to be moving firmly in the opposite direction is the Alternative Investment Market, or Aim as it is more commonly known.

New kid on the block

Launched just over two decades ago in 1995, Aim is less tightly regulated than the main markets such as the FTSE 100, but has, nonetheless, been the platform from which many businesses – including Domino’s Pizza and Asos – have gone on to achieve greatness.

Like many markets, Aim peaked in size in 2007 before the credit crisis and subsequent global economic downturn sent values plummeting. But unlike peers which have recovered much of their lost ground, Aim is still stalling.

According to statistics from the London Stock Exchange, there has been a sharp drop in the number of companies listing on Aim, with the total near halving from 76 in 2010 to just 47 in 2015. It is far below the peak of 399 seen in 2005.

The value of new money coming onto the market is also tumbling. Collectively, new and existing Aim companies raised £5.5bn in 2015, down from £7bn in 2010. In the last year alone it saw inflows drop by £400m, while the number of admissions to the market halved.

Meanwhile, the growth of crowdfunding is impressive. Last year, the total value of all investments increased by 295 per cent, from £84m in 2014 to £332m. Moreover, the average age of companies raising on crowdfunding platforms has increased to 3.32 years, showing a widening appeal that extends beyond very early stage startups.

If this market grows at a similar rate this year and Aim fails to reverse its downward trend, alternative finance will overtake the London Stock Exchange’s junior market.

Even the argument that Aim offers more protection for investors is redundant, with one of its biggest supporters recently commenting on what a jungle it can be when it comes to finding the right stocks to back.

Harry Nimmo, the famed smaller companies investor who has run the Standard Life Investments UK Smaller Companies fund for almost two decades, told Investment Week that at least half of Aim is made up of conceptual or blue-sky investments which have no revenues and should be avoided.

That is not to say there are no opportunities within Aim – of course there are. But investors may struggle to back the right investments, especially as their knowledge and understanding of what many of the companies actually do will be limited.

Different strokes

Aim has its place, of course. For one, it offers investors the potential to exit early from investments, with the shares not only tradeable on the main market but also via registered secondary market participants.

This liquidity should not be overlooked as it provides flexibility for those who suddenly need to redeem holdings. Although some crowdfunding platforms are looking at offering secondary markets, and companies can turn to the likes of Asset Match to realise liquidity, trading shares is currently not possible via crowdfunding – investors are locked-in for the full life of the products they buy.

Additionally, companies will rightly view Aim as a starting point on their potential journeys to achieving full listings on the main market. That will always be appealing for some business owners.

So alternative finance as an industry also has a lot of ground to make up (as you would expect, given the huge disparity in their respective lifespans). The market value of all registered companies on Aim totals £69bn currently, versus £6.5bn for the whole of alternative finance.

Other hurdles facing facing alternative finance include continuing to ensure that the investor is at the heart of the offerings coming to market, along with any more stringent regulation which could be brought in – particularly in response to failure to do the former.

And yet alternative finance continues to offer investors and SMEs something which Aim has always struggled with – a relationship.

Aim has remained a faceless stock exchange where communications between investors and the companies they buy is non-existent, and driven by broker recommendations.

In contrast, alternative finance brings both parties much closer together – be that via the manner in which raises are carried out, the way investors are rewarded, or the types of business the market naturally attracts (which include brewers like Innis & Gunn, as well as famous high street chains and sporting venues, all of which are well-known and understood by potential investors).

While its impact may be hard to quantify, there can be no denying that it is also simply trendier to turn to alternative finance. If there is a buzz around a particular part of any market, it naturally catches the attention of more people, and businesses will want to share in and benefit from this.

If it can maintain this relationship aspect as the sector develops and more companies exit and default, I’ve no doubt that alternative finance could not only surpass Aim, but also eclipse it.